Israeli banks have notified Palestinian partners that they intend to cut key banking services in the coming weeks, Israeli and Palestinian officials said, sparking fears of an economic crisis in the West Bank.
These banking connections are critical for financing imports from Israel to the Occupied Palestinian Territory, including electricity, water, fuel and food, as well as paying wages to Palestinians working in Israel.
Five Palestinian banks that depend on the correspondent banking services of Israel’s Hapoalim Bank will lose access to those services on August 13, Palestinian banking officials told AFP.
Banks that operate through Discount Bank will face service interruption on September 1.
The Israeli Ministry of Finance confirmed that two banks proposed to cut ties with Palestinian banks.
“In light of the overall risk environment and growing concerns about private lawsuits against banking institutions, Israeli banks recently announced their intention to stop providing correspondent banking services,” the ministry said in a statement released on Wednesday.
The ministry stated that it is holding discussions with the banks to “enable the continuation of correspondent banking activities in a safe and responsible manner, while protecting the security and economic interests of the State of Israel.”
The two banks currently act as a bridge between the Palestinian and Israeli financial systems, processing transactions in Israeli shekels – a currency also used in the Palestinian territories.
In order to protect Israeli banks from legal liability for transactions processed on behalf of Palestinian banks, the Israeli government renews a guarantee every six months to protect them against certain risks.
An Israeli banking official told AFP that commercial banks no longer wanted to take on those risks – including possible exposure to money laundering or terrorist financing – arguing that such an arrangement was meant to be temporary from the start.
“Risks have increased over the years, and the exemption is no longer enough. They (banks) want the state to take responsibility,” the official said.
Discount Bank said it had raised its concerns with the government.
“Given the increased risks associated with the provision of these services and our responsibility towards depositors and shareholders, we have indicated our warnings to the competent institutions,” the bank said in a statement to AFP.
Hapoalim said only that “the matter is currently under consideration.”
Experts interviewed by AFP warned that severing these banking links could force more transactions into cash transactions, increasing the risk of a banking crisis and the spread of the shadow economy.
“The Palestinian Authority is the biggest borrower at local banks because it relies on them to finance public sector salaries and budget deficits,” said a Palestinian businessman close to a local bank.
“If the banks collapse, so does the Palestinian Authority.”
The Palestinian Authority is already facing severe financial pressure after Israel suspended the transfer of customs revenues it collects on its behalf.
These revenues account for approximately two-thirds of the Palestinian Authority’s income.
